Squeezing linkLine: Rethinking Recoupment in Price Squeeze Cases

• Date: 01 June 2020
• DOI: http://doi.org/10.1111/ablj.12165
• Author: Patrick Kennedy
• Published date: 01 June 2020

American Business Law Journal

Volume 57, Issue 2, 383–437, Summer 2020

Squeezing linkLine: Rethinking

Recoupment in Price Squeeze Cases

Patrick Kennedy*

The Supreme Court’s decision in Pacific Bell Telephone Co. v. linkLine Com-

munications, Inc. removed an important tool from competition regulators’

arsenals. Not only did the Court express skepticism about the existence

of a price squeeze cause of action, but it also applied the economically

mismatched predatory pricing test to price squeeze cases. Unfortunately,

the lack of clarity on linkLine’s reach also caused significant confusion in

the lower courts. Examining these issues, this article clarifies the distinc-

tion between price squeeze and predatory pricing claims, and argues that

the second step of the predatory pricing test, probability of recoupment,

is inappropriate for price squeeze cases and should either be dropped

from the test or replaced with a presumption of recoupment.

INTRODUCTION

The latest merger proposal between AT&T and Time Warner raises a

familiar specter in the United States’ economic landscape: industrial con-

solidation is increasingly becoming a reality facing consumers.

1

Consoli-

dation raises fears of monopolization and a related concern that

consumers will face higher prices, fewer choices, and drastic shortages of

*Law Clerk to the Hon. Marvin E. Aspen, United States Senior District Judge. J.D.,

Stanford Law School and Ph.D. Candidate in Economics, University of Illinois-Chicago.

The views expressed in this article are entirely my own and do not reflect the views of my

employer in any way. My thanks to the editors of the American Business Law Journal for their

hard work and editing advice. Thanks also to Professor Mitch Polinsky, Sophia Cai, and

Sean Kennedy for their helpful advice and edits.

1

See Bryan Adams, Creating A Consolidated Look at Industry Concentration (May 23, 2017),

https://insight.factset.com/creating-a-consolidated-look-at-industry-consolidation.

©2020 The Author

American Business Law Journal ©2020 Academy of Legal Studies in Business

383

popular products. Conversely, mergers and acquisitions can also lower

prices, as consumers discovered following Amazon’s acquisition of Whole

Foods in 2017.

2

Striking the correct balance between encouraging pro-

ductive mergers and acquisitions and screening out those that harm con-

sumers is crucial to protect consumers from rising prices across virtually

every industry. Given the difficulty of this project, a renewed academic

focus on both predatory pricing

3

and vertical consolidation has emerged

in recent years.

4

For many scholars exploring these issues, constantly

dropping prices and increasing industry concentration portend a worry-

ing future, particularly in online and high-technology markets.

5

A num-

ber of novel suggestions have arisen from those academic discussions,

2

Jordan Valinsky, Amazon Is Cutting Prices at Whole Foods Again, CNN MONEY (Nov. 15, 2017,

12:48 PM), http://money.cnn.com/2017/11/15/news/companies/amazon-whole-foods-price-

cuts/index.html (“It’s the second time Amazon took the knife to Whole Foods’ prices. The

company slashed prices on nearly 500 grocery items in August. . . .”).

3

See generally Aaron S. Edlin, Predatory Pricing: Limiting Brooke Group to Monopolies and

Sound Implementation of Price-Cost Comparison, 127 YALE L.J. F. 996 (2018) (arguing that the

below-cost pricing requirement from Brooke Group should not apply to monopolies); Harry

First, Excessive Drug Pricing as an Antitrust Violation,82A

NTITRUST L.J. 701 (2019) (arguing

for expanding predatory pricing beyond the Brooke Group test for pharmaceuticals to con-

demn monopolies engaging in exceedingly high pricing); C. Scott Hemphill & Philip

J. Weiser, Beyond Brooke Group: Bringing Reality to the Law of Predatory Pricing, 127 YALE L.J.

2048, 2058–59 (2018) (arguing for reconsidering the history of Brooke Group and the appli-

cability of the precedent beyond oligopolies); Lina M. Kahn, Amazon’s Antitrust Paradox,

126 YALE L.J. 710 (2017) (arguing for a neo-Brandeisian approach to predatory pricing

focusing on counterveiling power); Ashlyn Myers, Amazon Doesn’t Have an Antitrust Problem:

An Antitrust Analysis of Amazon’s Business Practices,41H

OUS.J.INT’LL. 387 (2019) (arguing

against expanding antitrust law’s conception of predatory pricing in the context of

Amazon).

4

For instance, the Federal Trade Commission (FTC) and Department of Justice (DOJ)

recently announced a new set of vertical merger review guidelines, published in draft form

on January 10, 2020. See Jon B. Dubrow et al., FTC and DOJ Draft Vertical Merger Guidelines

Provide Additional Transparency to Agency Practice,N

AT’LL. REV. (Jan. 14, 2020), https://www.

natlawreview.com/article/ftc-and-doj-draft-vertical-merger-guidelines-provide-additional-

transparency-to (clarifying when the DOJ and FTC might challenge previously rarely chal-

lenged vertical mergers). See also Jonathan M. Jacobson, Vertical Mergers: Is It Time to Move

the Ball?,33A

NTITRUST 3 (2019) (arguing for expansion of vertical merger review and

against lax enforcement of vertical mergers); Tawanna Lee, United States v. AT&T, Inc.,

11 FED.COMM. L.J. 447 (2019) (describing the D.C. Circuit’s refusal to permanently enjoin a

vertical merger between AT&T and Time Warner); Note, Vertical Shareholding, 133 HARV.

L. REV. 665 (2019) (arguing for application of vertical antitrust rules to shareholders with

holdings at multiple levels of the same market).

5

See, e.g., Kahn, supra note 3, at 790.

384 Vol. 57 / American Business Law Journal

suggesting everything from changing the judicial view of the history of

important precedential cases to reconceptualizing what anticompetitive

conduct means. However, very few have returned to a particular theory

of anticompetitive harm, the price squeeze theory of harm, that sheds

light on a number of frequent issues in vertical merger enforcement.

6

A

price squeeze refers to a scheme where a vertically integrated firm with

control of an intermediate market leverages its market power to squeeze

the profit margins of its competitors in the retail portion of the market.

Unfortunately for those seeking to limit the excesses of consolidation,

the Supreme Court’s 2009 decision in Pacific Bell Telephone Co. v. linkLine

Communications, Inc.

7

removed an important tool from the antitrust plain-

tiff ’s arsenal, the “price squeeze” theory of liability. Without this theory

as a viable cause of action, vertically integrated firms are now free to

“squeeze” their nonintegrated rivals that purchase wholesale or

upstream products from them, unless the vertically integrated firm char-

ges a price below its cost of production. The Court’s decision in linkLine

is not only dangerous for consumers, but it also adopts a test out of sync

with economic theory. Legal misunderstanding of economic theory raises

significant stakes here because, as Justice Powell observed, good “eco-

nomic sense” determines so much of antitrust law.

8

This linkLine result is

especially troubling, given that a “price squeeze” scheme can harm con-

sumers without any firm possessing market power,

9

which distinguishes

6

See generally Rebecca Haw, Amicus Briefs and the Sherman Act: Why Antitrust Needs a New Deal,

89 TEX.L.REV. 1247 (2011) (discussing the difficulties with judges making antitrust deci-

sions with unpredictable and wide-ranging consequences, including price squeeze claims).

Haw’s article argues in favor of allowing agencies to use rulemaking in order to regulate

antitrust more directly, rather than relying on judges who occasionally do not have the nec-

essary economic expertise to comprehend the impact of their decisions. Id. at 1248. Her

argument functions as the intellectual backbone of my contention that the FTC should use

its authority to adjust evidentiary burdens in antitrust cases, rather than waiting for judges

to understand that recoupment is economically irrelevant to price squeeze claims. See id.at

1272 (“The Linkline Court’s two-component conception of a price squeeze is incoherent.”).

7

555 U.S. 438, 449 (2009).

8

See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). The

Court has also previously stated that it “[feels] relatively free to revise [its] legal analysis as

economic understanding evolves and ...toreverse antitrust precedents that misperceived

a practice’s competitive consequences.” Kimble v. Marvel Entm’t, LLC, 135 S. Ct. 2401,

2412–13 (2015); see also Hemphill & Weiser, supra note 3, at 2058.

9

See infra Part II (discussing the economic frameworks in which price squeezing arises).

2020 / Squeezing linkLine: Rethinking Recoupment in Price Squeeze Cases 385